140 this note uses the term employment generation to

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Unformatted text preview: iew 89: 22‐46 103 Annex 1: Index Components Public Debt. Lower levels of public debt may signal successful efforts of fiscal consolidation as well as better debt management practices. As an indicator of debt levels we use the general government debt as a percentage of GDP over 2005‐2008. As shown in Figure 6, Chile is by far the best positioned country in this respect, while Brazil exhibits the largest level of public debt in our sample, and is followed by Argentina, Bolivia and Mexico. Primary deficits. During periods of liquidity constraints —either in domestic or international capital markets— governments may need to rely on liquidity buffers to finance stimulus programs. We focus on the average primary balances between 2005 and 2008. Figure 7 shows that between 2005 and 2008 Chile had the largest primary surplus whereas Venezuela had the lowest – despite the sharp increase in this country’s fiscal revenues thanks to rising oil prices. Commodity dependence. Our indicator of choice is the response of central government revenues (as a percentage of GDP) to a 10% increase in the Reuters/Jefferies CRB index of commodity prices. Figure 8 shows that the LAC countries that are exporters of oil and natural gas (Bolivia, Ecuador, Mexico and Venezuela) appear to be the most vulnerable, in terms of reductions in fiscal revenues, to the ongoing declines in commodity prices. At least in the LAC9 group, the countries with the lowest sensitivity of fiscal revenues to fluctuations in commodity prices are Brazil and Colombia. Expenditure rigidity. Countries with a higher share of earmarked spending arguably have a smaller room to undertake discretionary fiscal policies.134 We measure this through the share of mandatory spending in total spending, where mandatory spending is the sum of public wages, interest payments, social security payments and transfers to regions (or provinces). Figure 9 shows that mandatory spending was lowest in Colombia and largest in Brazil, Mexico and Venezuela. In Argentina and Venezuela, about three quarters of mandatory spending come from social security and transfers. Ecuador and Bolivia display the largest contribution of public wages while Colombia shows the largest contribution of interest payments. Access to finance. Countries with deeper local currency debt markets and those with less restrictive access to world capital markets are expected to face lower financing constraints. Our composite index uses the following variables to measure this factor: (a) capital raisings by the private sector in the domestic market (as % of GDP) as a measure of depth of local currency debt markets, (b) gross capital inflows (i.e. FDI, portfolio equity, portfolio debt, and other investment) as % of GDP as a measure of access to funds abroad, and (c) an indicator variable that accounts for the fact that some countries have swap lines with foreign central banks and some LAC governments pre‐qualify for the flexible credit line (FCL) with the IMF. Figures 10 and 11 show the size of capital raisings by LAC9 countries and the gross capital inflows to those countries during 2005‐2008. Overall, Chile and Brazil...
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